Business columnist

The Republic of Mozambique has about the same population as Australia, and it drives on the left side of the road – but that is where the similarities end.

Australia's per capita gross domestic product is 40 times higher than the East African nation's and its infant mortality rate is way below Mozambique's 10 per cent.

But when it comes to energy policy there is no contest: the Australian Labor Party has been done cold by the Liberation Front of Mozambique.

In developing the gargantuan gasfields recently discovered in the north of the country, the government of Mozambique has embraced "unitisation".

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That is, the oil and gas majors have agreed to develop one project together and calculate their economic interests in this project by the amount of gas they contribute.

In stark contrast, there are no fewer than four liquid natural gas consortiums in Queensland, three of which are constructing – on slightly differing time frames – their own pipeline systems to Gladstone.

These three, GLNG headed by Santos, Origin's APLNG and BG's Queensland Curtis LNG, are also building three separate LNG processing facilities on Fisherman's Island off the coast of Gladstone.

The upshot is a triplication of infrastructure and, as costs rise and field gas flows show unimpressive results, it now appears too late to merge the projects into joint ventures to better manage risks, as was done by the North-West Shelf partners in Western Australia 30 years ago.

It is, of course, best to keep government out of business wherever possible. In the case of Queensland LNG though, the laissez-faire government policy and rampaging corporate egos wanting to be first to get a project up, or win the prized project "operator" role, have conspired to create a costly mess.

"The destruction of shareholder value has been immense," says one industry player who declined to be named. "The (investment) return which each of these players is getting is a far cry from the synergies that might have been achieved. The government should have stepped in".

For Australia's beleaguered energy consumers – across the gamut of households hit by rising electricity costs to corporations baulking at the spectre of soaring gas contracts, the crowd scene in Queensland LNG signals even higher gas prices.

The general view among industry insiders is that prices will rise more in Queensland than other states, but all states will also be affected.

"High Queensland prices will attract gas from other states to help supply the LNG plants, which will in turn cause those states to experience price rises as supply is redirected to Queensland," says energy consultant Andrew George.

South Australia and NSW may be most affected, as they obtain large volumes of gas from the Cooper Basin, which also supplies gas to Queensland.

Besides GLNG, APLNG and QCLNG, a fourth proposal – the Arrow project, now owned 50-50 by Shell and PetroChina – is deferred but unlikely to have the gas resource to put into the domestic market at lower prices, therefore admitting defeat on plans to make their LNG story work.

Between them, the four projects hold rights to more than 90 per cent of Queensland's gas reserves (on the most common 2P measure of "proven and probable" reserves).

"The other smaller reserves base is not available in big chunks from multiple competitive suppliers," says Andrew George. "So domestic gas supply competition is very limited – read price rises and short contract durations".

Several big industrial gas users in Queensland have sought medium- to long-term deals for gas supply contract renewal in recent times, but have been unable to get the gas they need.

Meanwhile, the development approvals for the LNG projects have been struck without non-environmental caveats, despite the calls from industry to have governments seek project mergers or domestic gas reservations, or other restrictions.

All these things might have helped avoid a lack of gas being available domestically at reasonable prices – that is, less than Asian export prices.

The big gas users now despairing over a dearth of supply options in Queensland include the likes of Queensland Cement and Rio. Privately, no industrial users are happy with the prospect of inefficient duplicate infrastructure, and risks of energy cost increases, leading to the potential closure of energy intensive businesses. This is most likely to occur when new capital is required for refurbishment, or when markets decline.

The plight of aluminium smelters is instructive – Gove in the Northern Territory for one. High energy prices are hitting industry hard already.

If shutdowns occur, the problems snowball for government as there is no plan for managing the job losses, addressing training needs and coping with industry changes in the economy.

James Reynolds, principal of consultancy Marchment Hill, believes the prospects for rationalisation in Queensland are gone and prices are trending higher.

"You can always say they should merge and consolidate. But they are not stand-alone businesses. They are joint venture structures. They are complex structures and it is hard for one to take over another."

Most observers agree the horse has bolted. As Reynolds points out, the three consortiums are allied with sovereign partners China, Malaysia and Singapore. The Asians are locking in their energy needs.

Sadly, the Aussies have not – at least not at reasonable prices. In WA, there has been a 15 per cent obligation set aside for local needs. In Queensland, no such thing.

Meanwhile, across the Indian Ocean, Armando Guebuza's Liberation Front of Mozambique has taken the right tack, unitisation.

A little more than a year ago, Italian oil and gas giant Eni found the largest discovery in its history, and it keeps getting bigger.

This new frontier is expanding into Tanzania, Kenya and Ethiopia. It has even been dubbed "the new Middle East".

Eni is in talks with Shell and Exxon and other majors with a view to partnering on the project.

And although there is speculation of a stand-off in negotiations between Eni and the Houston-based Anadarko, unitising and developing a field at a time would seem the sensible way to go – better at least than a free-for-all.

12 comments

Very interesting ... In addition there is likely to be far less environmental impact as well!!! So better for business, the state and the environment. Well played Mozambique.By the way the 3 LNG facilities are on Curtis Island not Fishermans Island.

Commenter

qlder

Location

qlder

Date and time

February 08, 2013, 3:02PM

Never put all of your eggs in one basket (let alone an African basket case). That is a standard investment strategy.

Commenter

Sean

Location

Sydney

Date and time

February 08, 2013, 3:28PM

So Michael, let's be clear about where you stand on this (having read your columns over many years, you don't hold back on voicing your generally snide, cynical opinions) you actually WANT the Government to step in, co-ordinate & maybe even have equity interests in energy & resource projects in Australia?? Just asking for a bit of "philosophy" here, rather than just cheap shots...........

Commenter

djpoh

Location

Date and time

February 08, 2013, 3:47PM

Why is it always a government's responsibility to bail out or prevent stupidity caused by the supposedly more "efficient" private sector?

This sort of common-sense that benefits the overall majority versus narrow interests comes in a poor second to pig-headed ideology for most Australians if the polls are anything to go by, just look at the reaction to the original mining tax!

Commenter

DC

Location

Melbourne

Date and time

February 08, 2013, 3:49PM

Interesting piece except Gove is a refinery not a smelter

Commenter

airato

Location

Date and time

February 08, 2013, 3:50PM

Right from the beginning the lack of direction and guidelines from both tiers of government can only be described as a disaster and inept on a grand scale. To allow these companies to "do" their own thing was always going to result in duplication of infrastructure to not great benefit of any party. The next example of this will be the Shell Floating LNG Platform. The overall quest for efficient delivery was lost at the first jump But you can bet your last dollar that we will all pay the price at the meter

Commenter

Long Gone

Location

Perth

Date and time

February 08, 2013, 3:54PM

Mozambique probably has a less corrupt system for approval too.

Commenter

Paul

Location

Sydney

Date and time

February 08, 2013, 3:55PM

From my brief time in Mozambique in the mid part of last decade, you could tell they had their collective heads screwed on the right way back then. Unlike many other developing nations in Africa, they have established a sound governance structure which is conducive to Foreign Direct Investment. They'll be going places. It's why Rio moved in there (albeit paying a little too much!), BHPB have interests there, as the Government are putting in place savvy and smart policies and after nearly two decades of civil war, the locals just want to move on. We'll be hearing more of Mozambique as this century continues. They certainly could be the Taiwan of the 80s or the Malaysia of the 90s.

Commenter

DJCJ

Location

Melbourne

Date and time

February 08, 2013, 4:08PM

What a lot of useless fearmongering this article contain's.Why are gas prices going to go up when many respected economists are saying there's an oversupply worldwide ?You fail too to mention, the United States has a large supply of gas currently available because of all the fracking that's been done in the U.S.over the last 5 years.Both BHP and Rio are looking at more and more shale oil and gas purchases around the globe ,while the potential of the largest concentration of gas that makes up greenhouse gases around the globe in Methane has hardly been explored.And then there's the good ole consumer.If prices get too high ,people will simply look to other forms of energy instead of gas like solar.These greedy scumbags who control these asset's kid themselves.Raise the price to high and you watch Australian consumer's give them the heave ho.It's happening already and if you don't want to burn gas you can always burn wood for starters cant you ?

Commenter

Fred Finger

Location

Big Rock W.A.

Date and time

February 08, 2013, 4:22PM

Michael might have mentioned Rio's experience in Mozambique...which demonstrates the risks of investing in far flung unstable locations which might promote "unitisation" as a worthy policy but scratch the surface and you find high business and sovereign risk. As the former CEO of Rio has found to his immense cost.